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Cablegate: Sub-Saharan Africa: Regional Economic

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 PRETORIA 004352

SIPDIS

DEPT FOR AF/S; AF/EPS; EB/IFD; EB/TPP
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND
TREASURY FOR BCUSHMAN
DEPT PASS USTR FOR PCOLEMAN

E.O. 12958: N/A
TAGS: EFIN EINV ETRD PREL ECON SF XA
SUBJECT: SUB-SAHARAN AFRICA: REGIONAL ECONOMIC
OUTLOOK

1. (U) Summary. In discussing the IMF's first ever
Regional Economic Outlook for Sub-Saharan Africa,
IMF officials announced that the outlook for real
GDP growth in SSA was good, with 2004 registering
5.3% growth and 2005 and 2006 expected to register
growth of 4.6% and 5.3%, respectively. Rising
commodity prices for oil, metals, diamonds,
agricultural products, and other commodities
stemming from strong import demand from more
advanced economies contributed to the positive
regional outlook for growth. Improved growth and
higher per capita income continued to make inroads
on poverty. Notwithstanding, economic growth
remained below the level required for sub-Saharan
Africa to reach the Millennium Development Goal of
halving poverty by 2015, and was much lower than
other developing country regions. The IMF noted
an overall improvement in the quality of both
economic and political institutions in the region.
End Summary.

2. (U) On October 12, the Development Bank of
Southern Africa (DBSA) and the International
Monetary Fund (IMF) hosted presented the IMF's
World Economic Outlook and the IMF's first ever
Regional Economic Outlook for Sub-Saharan Africa
(SSA). Presenters included IMF Deputy Director
for Research David Robinson as well as Michael
Nowak and Sanjeev Gupta of the IMF's Africa
Department. Mr. Nowak delivered the presentation
on the Economic Outlook for SSA.

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OUTLOOK FOR ECONOMIC GROWTH
---------------------------

3. (U) Nowak announced that the outlook for real
GDP growth in SSA was good, with 2004 registering
5.3% growth and 2005 and 2006 expected to register
growth of 4.6% and 5.3%, respectively. Oil
producing countries led the way, with the
economies of countries such as Equatorial Guinea,
Chad, Nigeria, and Angola expanding strongly.
Rising commodity prices for oil, metals, diamonds,
agricultural products, and other commodities
stemming from strong import demand from more
advanced economies contributed to the positive
regional outlook for growth. Slower growth in
Chad, Nigeria, and Equatorial Guinea was the main
reason for the expected lower real GDP growth in
2005. In South Africa, real GDP growth rose 3.7%
in 2004 and was expected to grow another 4.3% in
2005. Growth in South Africa was the result of
strong consumer and investor confidence, fueled by
low interest rates, controlled inflation, and
wealth effects from increases in commodity and
residential property prices. Nowak added that non-
oil producing countries that had adopted economic
reforms in an effort to improve the climate for
private investment grew at faster rates than those
that did not.

OUTLOOK FOR POVERTY REDUCTION
-----------------------------

4. (U) Nowak said that improved growth and higher
per capita income continued to make inroads on
poverty in SSA. In 2004, real per capita GDP in
SSA rose by 3.4%. The IMF projected that real per
capita GDP would increase by 2.6% in 2005 and 3.4%
in 2006. Nowak noted that GDP per capita had
grown faster in recent years and was strongly
correlated with poverty reduction.
Notwithstanding, economic growth remained below
the level required for SSA to reach the Millennium
Development Goal of halving poverty by 2015, and
was much lower than other developing country
regions. GDP growth per capita in six countries
(Cote d'Ivoire, Gabon, Central African Republic,
Comoros, Guinea-Bissau, and Zimbabwe) continued to
decline in each of the past three years,
indicating an increase in poverty.

OUTLOOK FOR INFLATION
---------------------

5. (U) Nowak pointed out that inflation in SSA had
fallen to an historical low of 9.4% in 2004, and
although the IMF expected inflation to pick up
slightly -- to 9.9% in 2005 due to higher oil
prices and poor harvests -- it also expected
inflation to fall to 8.3% in 2006. Continued low
inflation, low interest rates, and prudent
monetary policy in an increasing number of SSA
countries contributed to single digit inflation
for the balance of the region. Thirty countries
were expected to register inflation rates in
single digits during 2005, as compared with just
10 countries a decade ago. In 2004, only Angola
and Zimbabwe experienced inflation above 20%. In
South Africa, inflation averaged 4.3% in 2004
(Note: this refers to consumer price inflation
less mortgage costs). In 2005, the IMF expected
South Africa's inflation to be 4.1%, well within
the South African Reserve Bank's target range of 3-
6%.

CURRENT ACCOUNT ANALYSES
------------------------

6. (U) The IMF expected oil producing countries to
log significant current account surpluses in 2005,
reaching 7.7% of GDP in 2005 from 2.3% in 2004.
The average external current account deficit of
oil-importing countries was projected to rise,
from 3.5% of GDP in 2004 to 4.3% in 2005, although
oil price pressure on current accounts would be
somewhat mitigated by international exchange rate
adjustments and rising commodity prices. In South
Africa, strong domestic demand should widen the
current account deficit by 0.5% to 3.7% of GDP in
2005. South Africa's current account deficit
should lessen in 2006.

RISK FACTORS
------------

7. (U) Nowak explained that the following five
risk factors could change IMF projections for
2006: 1) fragile political security in the Great
Lakes region and West Africa might not be
maintained; 2) lower commodity prices,
uncertainties in the oil markets, and higher than
expected oil prices could play havoc with current
account deficits; 3) weaker than expected growth
in more developed countries could impact SSA
exports; 4) regional droughts and other natural
disasters could be a problem; 5) the high
prevalence of HIV/AIDS could begin to affect the
prospect for economic growth in some countries.

FOREIGN ASSISTANCE
------------------

8. (U) Nowak noted that foreign assistance,
including debt relief to SSA, continued to
increase. Excluding South Africa and Nigeria,
official grants as a share of GDP were projected
to increase to 3.2% of GDP in 2005, from 3.1% in
2004. The average external debt burden was
expected to continue declining as a share of GDP
as more countries receive debt relief under the
Heavily Indebted Poor Countries Initiative. Nowak
explained that increased development assistance
and the reduction in debt could enhance prospects
for regional growth and poverty reduction,
assuming that the right policies were implemented
to ensure that additional resources were used
efficiently.

INSTITUTIONS
------------

9. (U) According to Nowak, the existence of strong
institutions was an important determinant of long-
term growth. Nowak cited recent evidence that the
quality of political institutions fostered
political stability and in turn influenced the
quality of economic institutions and thus economic
performance. Research also showed that strong
institutions led to better IMF program
implementation. Nowak noted an improvement in the
overall quality of both economic and political
institutions in SSA.

REGIONAL TRADE AGREEMENTS
-------------------------

10. (U) Nowak observed that African policymakers
seemed to use Regional Trade Agreements (RTA) as a
substitute for broad-based trade reform. The
practice had resulted in an overlapping network of
30 RTA's that sometimes created contradicting
commitments. So far, African RTAs had little
significant impact on Africa's export performance
with the rest of the world. The continent's share
in global trade had declined from about 4% in the
1970's to about 2% today. Furthermore, African
RTAs had failed to increase Africa's international
competitiveness or attract foreign direct
investment to the region. Nowak though that this
was because the benefits of RTAs had been limited
by high trade barriers, small market size, poor
transport infrastructure, high border-crossing
costs, and inadequate efforts to facilitate trade.
Nowak suggested that African countries rationalize
their RTA membership.

CHALLENGES
----------

11. (U) Nowak emphasized that the most challenging
question facing SSA was how to accelerate economic
growth and reduce poverty. An analysis by the IMF
suggested a strong correlation between economic
growth and sound economic policies, a focus on
exports, the ability to attract investment,
relative trade liberalization, as well as
political liberalization. The World Bank's 2006
World Development Report highlighted that reducing
the costs of doing business and lowering policy-
related risks and barriers to competition were
central to improving the developing country
investment climates. Nowak added that the report
listed 20 countries with the most difficult
investment climates in the world, 16 of which were
located in SSA.

TEITELBAUM

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